Mainland Buyers Pour In as Hong Kong Property Slows

Alex Frew McMillan|CNBC, Contributor

Tuesday, 30 Aug 2011 | 11:55 PM ETCNBC.com

SHARES

Elaine Fang, a real-estate broker with Midland Realty on Hong Kong Island, is very happy to see mainland Chinese buyers walk through the door of her branch at The Belcher’s. If she does her job, she’ll sell an apartment. If she does it well, she’ll sell a whole floor of a building.

Photodisc | Getty Images

Hong Kong skyline

That’s happened twice this year, with one buyer from across the border snapping up five units for a total of HK$72 million (US$9.2 million) at the Kerry Properties development Soho 189. It’s a new building in the happening part of Mid-Levels, a short walk from downtown.

Another Chinese buyer picked up a storey at HarbourOne, a building under construction along the waterfront just west of Central. Three large apartments in that storey cost HK$100 million (US$12.8 million).

“They bought the whole floor — I don’t know whether it’s for their own use or for rental, because the apartments will be ready at the end of next year,” Fang says. But she doesn’t think they’ll need much financing. “Most Chinese buyers will do full payment,” in cash.

No surprise, then, that signs are appearing in the windows of the brokerages that dot virtually every Hong Kong main street. “We have Mandarin-speaking staff to welcome you!”

“Come, mainland friends, and buy to your heart’s content in Hong Kong since we have no home-purchase restriction!” read another sign.

Around 40 Chinese cities restrict families to a maximum of two apartments, and one for non-locals. But Hong Kong, a Chinese territory with its own law, has no such curbs on the number of properties anyone can own.

Amid a marked slowdown in transactions from local buyers, mainlanders may be the saving grace for Hong Kong property agents, who otherwise face long days by a quiet phone. The number of sales & purchase agreements signed here in July, the latest month available, was down 37 percent from June — and 51 percent compared with July last year.

Attempts by the Hong Kong government to curb the territory’s surging property prices, up 78 percent since the start of 2009, have chased away local buyers but aren’t dissuading mainland Chinese. The government mission to tackle the runaway market is mainly making it harder for locals to buy.

“Hong Kong is like paradise for mainland Chinese,” John Au-yeung, who runs the brokerage Fidelity Realty, says. “So there will be more and more of them coming to buy properties. I have no doubt about it.”

Both Fang and Au-yeung estimate that 40 percent of the deals they have done this year are with buyers from mainland China. And because mainlanders favor the upper end of the market, their influence is even greater when you look at the value of the properties — about 70 percent of Fidelity’s income comes from mainland Chinese.

A lot of the sales are low profile because buyers prefer it that way. In July Au-yeung sold a property to a famous Chinese movie star — he won’t say who — for HK$60 million. She wanted a base in the city since her husband’s business operates from here.

“We told nobody,” he says.

Hong Kong moved again in June to curb the territory’s property prices, which are pushing past their high point set during the 1997 bubble. The government, which controls almost all unused land, has pledged to double the amount of supply sold to develop new apartments.

Buyers must also now put down at least 50 percent on homes worth more than HK$10 million, and at least 40 percent on homes worth more than HK$7 million. Borrowers can still get a loan-to-value ratio of up to 70 percent on homes worth less than HK$7 million.

Famously free-market Hong Kong also for the first time took aim at overseas buyers. Anyone who gets their main income outside Hong Kong can only borrow at 10 percentage points less than the rate for Hong Kongers, whatever the value. The move is widely seen as being aimed at buyers from across the border.

It’s not working. “A lot of the measures are well-intentioned but do have a lot of unintended consequences,” Paul Louie, the regional head of property research at Nomura, says. “They have inadvertently made it more difficult for locals to buy.”

The ratio of mainland buyers in Hong Kong is at an all-time high, according to his figures, with mainland buyers making up 24 percent of all sales in the city at mid-year, when you exclude corporate purchases. The normal range since he started tracking in 2009 has been 14 to 20 percent.

“We saw a pretty significant jump,” Louie says. “All the anti-speculative measures have actually frightened the locals more than foreigners and mainland Chinese.”

That’s not to say Chinese buyers are blasé about the turmoil in world stock markets. Many are taking a wait-and-see approach, or moving more slowly.

Joe Lo, a broker with Centaline at the Olympic Station branch in Kowloon, recently sold an 817-square-foot apartment to a mainland buyer for HK$8.95 million. She had waited to buy but thinks now is the time to get in.

“She rented an apartment for more than two years, but she wanted to invest in Hong Kong,” he says. “She thinks the market will still go up in the coming years. And she also wants to settle so she doesn’t need to move from here to there.”

Mainland buyers are used to paying in cash in China, and many are wealthy enough to do so in Hong Kong. So borrowing restrictions have little effect.

With few forced sellers and very low interest rates, with an effective mortgage rate of 2.4 percent, Hong Kong’s prices continue to creep forward. The University of Hong Kong Real Estate Index Series shows prices are up 12.5 percent in 2011, through June, with gains in each month. Still, Barclays Capital predicts values may fall as much as 30 percent going into 2012.

As a supportive factor, mainland buyers are “making quite an impact,” Nicole Wong, the regional head of property research at CLSA Asia-Pacific Markets, says. “Local Hong Kong people’s demand has waned sharply,” with secondary-market transaction volume currently just half of the historic average.

What mainlanders haven’t become so far are sellers. The brokerage Centaline put the figure at just 7 percent of luxury property sales, compared with 30 percent of purchases. So they may act as an inflationary but stabilizing force.

“As far as our clients are concerned, there is not one single speculator from China,” Au-yeung says. “They are doing long-term investment.”